Florida’s senator Rubio engages in verbal duel with MSCI over the access by China’s A shares to American institutional funds
- Florida’s Senator Marco Rubio asked MSCI to explain why it added hundreds of Chinese stocks to its benchmark emerging markets index last year and increased their weighting this year
- The moves paved the way for billions of dollars in investments and retirement-savings to flow to Chinese companies, Rubio said
“Currently there is no US law or regulation that prohibits an index company from creating an index containing China’s A [shares] or US investors from trading in the China [A shares] market,” MSCI’s Chief Executive Officer Henry Fernandez said in a letter seen by Bloomberg. China’s [A shares] are open to buying and selling by foreign investors.
Fernandez wrote in a response to questions from Rubio about the index’s composition that inclusion isn’t based on “subjective judgment regarding the company’s intrinsic value or basic practices,” but on standardised attributes such as company size and liquidity.
Some stocks in the index, such as Hangzhou Hikvision, have recently been placed on a US blacklist preventing business with American companies.
“It is deeply troubling that a company like Hikvision, which is complicit in China’s human rights abuses in Xinjiang and is on the Commerce Department’s banned Entity List, can get access to the US capital markets through an MSCI index,” Rubio said in a statement on Monday. “I will continue to work with my colleagues in a bipartisan fashion to ensure that US investors and pensioners are not at risk.”
MSCI didn’t respond to requests for comment.
Rubio’s pressure on MSCI is part of a larger campaign by US lawmakers to slow the spigot of money that has flowed from US investment funds into Chinese companies. The moves come during an ongoing trade war between the two countries that has prompted US officials to increase scrutiny to the money going into China.
American Securities Association CEO Chris Iacovella said MSCI’s response fails to address any of the concerns Rubio raised to protect American investors.
“MSCI continues to look the other way as it funnels billions of dollars of American money out of the US and into Chinese companies that are fraudulent, on the sanctions list, or do-not-do business list,” he said.
The White House has been in touch with Rubio to discuss its support for the matter, but the legislation’s prospects in Congress remain unclear.
The MSCI letter agreed with Rubio that investors should know where they are investing and said in some cases the company makes specific references to China’s different accounting standards, and identifies China as an authoritarian regime. A Rubio spokesman said the Senator’s office received the letter earlier this month.
The MSCI CEO drew the distinction between passive index funds that MSCI powers, which do not serve as investment recommendations, and active asset managers, who can pick and choose which stocks to direct funds. In addition to serving as a benchmark for investments, MSCI said its indexes are used by academic institutions and researchers, cautioning that requiring the index to exclude certain stocks would “severely limit the ability to understand and assess global markets.”
Rubio told Bloomberg earlier this year that he’s not advocating for an all-out ban on US investment in China, but for a regulatory body charged with examining investments, modelled on the Committee on Foreign Investment in the US, which was recently granted greater power to restrict Chinese acquisitions of US technology.
“Firms like MSCI have an obligation to make sure investors know whether their investment dollars are unwittingly aiding Chinese state-owned and state-directed companies linked to China’s efforts to steal American innovation, undermine fair competition, increase threats to US national security and economic security, and support China’s systemic and egregious human rights abuses,” Rubio said in an accompanying statement in June. “We can no longer allow China’s authoritarian government to reap the rewards of American and international capital markets.”
